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Houghton Ltd
Houghton Ltd. is trying to determine the value of ending inventory as of February 28, 2017, the company's year-end.
For the below transaction that occurred, specify whether the item in question should be included in ending inventory, and if so, at what amount.
- On February 26, Houghton shipped goods to a customer under terms of FOB destination. The invoice price was $410; the cost of the items was $280. The receiving report indicates that the goods were received by the customer on March 2.
Expert Solution
Answer: The item should be included in the ending inventory at its cost of $280.
Goods shipped under the terms FOB destination should be included in the books of the seller while they are in transit and as long as the goods are not yet received by the buyer. In the provided situation, the goods are received by the buyer only on March 2, which makes the inventory still on transit until the year-end date of February 28, which is why the inventory should form part of the merchandise inventory of the seller (Houghton Ltd.) at its cost of $280. Terms FOB destination means that the seller bears the transportation and delivery charges including the risks and ownership of the goods while in transit.
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